A Divided Middle
The erosion of the middle class has been a hot topic in the social sciences, public debates and the media in Europe in recent years. The focus has shifted from the precarious classes, the unqualified workers, the unemployed, single mothers and so on to the endangered middle class. The debate on the shrinking middle class as such is part of the inequality debate, but with the difference that it is not only the growing distance between the top and the bottom of the income hierarchy that is of concern, but the expanding number of members in both the lowest and highest income groups.
In research there is a lot attention to what is seen as the main cause of this polarization: the loss of skilled, well-paid jobs in industry, due to de-industrialization and globalization, skill-biased technological change or the weakness of unions (see also the articles by Evert-jan Quak and Jo Michell in this dossier). However, less attention is given to the role of welfare state redistribution in the alleged decline of the middle class and what impact social policies can have on the position of middle-income groups.
Research now shows that the decline of the middle class in most advanced economies is far more marked when you look at the total income generated from the market before taxation (market incomes) and less so when you look at income available for spending and saving after tax (disposable income). This suggests that the influence of social spending and the role of welfare states and taxation is significant for the stability of the middle class.
If the middle class is divided into a lower, middle and upper middle class, in many advanced economies it is the upper middle quintile that sees their income share rising. The lower middle and middle-middle, by contrast, have to accept a net decline in their positions. Their shrinking market income share is, however, almost completely compensated for by social security measures. This means that, although the lower middle class in particular shares the destiny of the lowest income groups, it benefits much more from social security measures.
What is known as the ‘middle-class crisis’ is receiving considerable attention because the destabilization it is causing seems more meaningful for the future of society than the state of low-income groups. The underlying assumption is that a well-off middle class is the storehouse of political stability and the goal of all those who hope to climb up the social ladder. Yet the flexibilization of labour markets, job losses due to globalization, and the financial and debt crisis of European countries now seem to be affecting even the middle class. Problems of income security and unequal distribution have penetrated to the core of society.
But are we really facing a middle-class crisis in Europe? Empirical data do not as yet unequivocally confirm this downward trend. The results are rather ambivalent, vary across countries and depend on the methods and measures used: while several studies produce evidence of a shrinking middle class, others show its income position to be stable.
Notwithstanding these different outcomes, one fact seems undisputable: the lower middle class – together with the lowest income group – is negatively affected by a polarized income structure that allows the income shares of the topmost 10% or 1% of the population to rise extremely high, while those at the bottom get smaller. In figure 1 this can be seen as the shrinking income shares of the bottom quintile and the lower middle quintile and a rising line for the income share of the 5th quintile.
Another reason for the differing explanations for the middle class crisis is the lack of attention to differences between countries. In liberal market economies, income inequality began to rise as early as the 1970s, and at a particularly fast pace in the United States. European countries resisted liberalization for a while, before giving way to entrenched labour market protection and social security when the problem of high and persistent unemployment could no longer be ignored or compensated by social transfer payments.
A dualization process can however be observed in Europe, which is counteracting erosion of the labour market status of the middle class.
In most European countries, the middle class has been better protected not only in the labour market, but also by social security systems, especially in comparison with American public policy. In many countries, public policy has tailored social security systems that closely connect the right to receive financial benefits to labour market participation. These systems insure the employed against the risks that come with old age, unemployment, illness and being in need of care. Welfare states also comprise measures that protect the poor, but usually social security measures aimed at the working middle class are the largest, most expensive part of the social expenditures.
Signs of dualization can also be observed within social policy programmes, too.
These arguments assume that the middle is not that endangered, at least in the field of public policies. Therefore it is important to have a better look at who drives public policies, including taxes, social transfer programmes like pensions, sickness allowances, employment protection and regulation policies. Here the middle class has hardly been a ‘problem child’. Instead, from a political economy perspective, the scale of the middle classes make them the group among the electorate with the required political power to direct social security and public policies.
If the middle class is such a decisive political force, it should therefore decide on taxes and social transfer programmes, equal access to education and health care, etc. In ‘democratic capitalism’ public policy and regulated industrial relations can mitigate market outcomes and make disparities between top and bottom regarding access to important resources like income, health care and education less severe. If they really are the powerhouse of public policy, why have the middle income strata not used their political power to implement market-correcting politics that tackle unequal distribution of wages, worsening labour protection for employees or cutbacks in social provisions during the past two decades?
The middle class is not a homogeneous group. As can be seen in figure 1, the income position of the middle class has developed very differently for each segment. Consequently, the political interests of the middle class are also divided.
However, cross-class coalitions of the middle class with those at the bottom cannot be taken for granted. And the role ascribed to the middle class by political economy as the politically most decisive group in a democracy to heal income inequalities is not realistic. In some European countries with a left tradition and a lack of Christian-democratic parties, like those in Scandinavia, cross-class compromises were quite common, especially during the 1960s and 1970s. Other European countries more often had social democratic governments expressing a cross-class compromise between middle and lower social strata than the US. The US majoritarian voting system by contrast excludes such ’left-leaning’ cross-class coalitions of the middle class. Here the upper middle is looking up the social ladder, which leaves the lower middle without a strong coalition partner. Low turnout of lower class voters further prevents them from having a political influence. In European countries absolute majority electoral systems enforce coalition governments that have to find consensual policies between the conflicting positions. Yet the majoritarian electoral system also leads to polarization in politics and is one of the reasons for the decline of the middle class.
The most significant shortcoming of democracy theory is that it conceives power only as emerging from large numbers of voters. But, as some rather disillusioned scholars have argued, democracy might also be just an ‘electoral spectacle’.
In a post-industrial economy, in which especially the richer part of society can improve its income position, redistribution policies are an important measure to counter income disparities. However, the middle class as a whole does not necessarily benefit. This is the case for the lower middle class and of course for the poorest groups, while the upper middle is heading towards the rich. Redistribution measures have different effects on the three middle class groups. The lower middle class will improve its income position, but less so than the poorest groups. The middle-middle group does not feel the impact of redistribution as it does not improve or worsen their income position. The upper middle group pays for redistribution and will not be a coalition partner of the poor.